 In this presentation we will work a problem with a change of estimate for depreciation. Here's going to be our data up top. We're going to enter this data into our worksheet here for depreciation and then the depreciation after the change in estimate. Then record the book value for each year that will be affected using our worksheet here. Our data up top says original data says that we had a cost of 50,000 salvage value 1,000 useful life for years. We're going to use a straight line method for this presentation. In our change of data we have the useful life at the beginning of year three meaning we had a change after the second year. We thought first off that it was only going to last three years and then after year two because this is just an estimate quite possible that it could come to light that we believe it's going to last longer than that or shorter than that whatever the estimate may be what we will not well that's going to be the change here. So we have the change here after year two it's going to have a useful life of four years after year two the salvage value only being however 500 rather than the original 1000. We're going to enter that data into our depreciation down here. We'll start off with the original straight line. We'll do this relatively quick because straight line is going to be the standard format and then we'll do what that change of estimate. So straight line we're going to start off with the cost that started out to be 50,000 that's not going to change of course because that's not an estimate that's what we're actually paying. Then we have the salvage value and that's going to be 1000 1000 that's given up here and we will subtract that out and that will give us the amount to be depreciated and we're going to say that that equals and B15 is 50,000 minus this 1000 or B13 minus B14 giving us 49,000 then we'll divide that by the useful life useful life which we said originally was three years three years scrolling back up to the data three years that's where we are picking that up from then we'll do our division problem and we will come to the depreciation per year if i spell some of this wrong i apologize for that so we're going to divide this out we got the 49,000 to be depreciated three years of depreciation we will then divide that out this equals the 49,000 divided by three years B5 divided by B or P15 divided by B16 that gives us our 16,333 this could be rounded so just note that there is rounding involved here we're going to round to the nearest dollar if you want to check round and you go to the home tab numbers and increase in denting that's really 3.333 16.333.333 so i'm going to take off the decimals then we're going to do our calculation up top for the book value and so remember whenever you're calculating depreciation it's often the case when we first learn it that we get to this depreciation per year and we're like okay we got the answer that's it but notice that any book problem can can give you ever any other components of depreciation including the accumulated depreciation or the book value so we need to know how to get those as well so you've got the cost which is going to be the 50,000 we've got the depreciation accumulated depreciation which will be the accumulation of depreciation over its useful life this only being the first year therefore we only have one year of depreciation which equals that 16,333 if we subtract this out then we say that this equals the 50,000 minus the 16,333 providing us with the 33,667 that is of course rounded as well so because this is straight line year two is going to be the same well the same cost of course cost doesn't change accumulated depreciation will be increased by the same amount meaning we have in the prior year equals this 16,333 in the prior year plus we've got another 16,333 for the current year depreciation giving us a total that didn't add let's do that one more time this equals this prior year's accumulated depreciation plus the current year's depreciation for year two giving us 32,667 we can then subtract that out finding the book value at the end of year two by saying equals this 50,000 minus the 32,667 giving 17,333 now we're not going to keep doing that because we thought it had a three year useful life and if we were to go to three years it would take the book value down to the salvage amount but this of course is the area where we now are saying there's a change in estimate so we now want to account for that change in estimate now note what we will not do is we're not going to say okay there's a change in estimate typically we're not going to go back in time and refigure out the prior years the prior years have already happened and therefore what we're going to do is fix things from this point forward that will usually be the case when we make a change in estimate in something like in this case both the salvage value and the useful life so what we're going to do is we're going to say okay i'm not going to go back if we do go back and part of the reasoning for that is that these depreciation amounts in year one and two have already closed out to retained earnings the books are basically closed so to go back and restate those financial statements might not be the the best option it might not be worth our time to do that it might be best at this point to say okay we recognize that there's a change in estimate at this time and make that change happen from this time forward so in order to do that what we're going to say okay i need to take the book value as of now we're not going to take the cost we'll take the book value as of it is as of the end of year two and then we'll apply the new changes to it using the same type of straight line or whatever depreciation method in our case straight line depreciation calculation so i'm going to go back over here we're going to say that now this is is not the cost but it's the book value uh at year two and at the end of year two this is the book value and that equals what we have in our worksheet over here that's where we're at at this time in terms of book value and then we're going to subtract out the salvage value now we're just going to apply the same type of formula we're going to subtract out the salvage which now has changed once again it was 1000 now it's 500 so we're going to subtract out the salvage of 500 and then we'll subtract those out and that'll be the amount to be amount to be depreciated so this equals 17,333 minus 500 or 16,833 and then we're going to divide that by the useful life as of this point in time the useful life the useful life and that's going to be the useful life is four and now we're going to take the depreciation per year for the rest of the remaining life of the depreciable property per year dividing this out so this is the amount to be depreciated this is the number of years we're going to say this equals this 16,833 divided by four years giving us 4,208 so this then is going to be our new number that we're going to depreciate for the rest of the time period we have four more years years three four five and six so we're going to say of course the cost will remain the same and the accumulated depreciation same calculation last year's accumulated depreciation where we stood in terms of the accumulated depreciation as of the end of year two plus let's get the plus this time not this step as we did last time as I did last time and then pick up the new depreciation per year new depreciation per year 4,208 there we have it and then we can subtract this out the book value as of year three equals this 50,000 minus the 36,875 giving 13,125 same thing for year four this equals the 50 still and we could copy this formula if we use absolute references just to show you what we'd want to do is this cell we'd want to change f13 to g13 so we wouldn't do anything that this cell we want to stay the same this cell we don't want it to move to column C so if I wanted to copy it across I can absolute reference it by saying f4 and that puts a dollar sign between before the B and the 24 we could use a mixed references all we need but I use an absolute reference won't hurt so we're going to say okay and then if I copy that across it'll do what we think it should do it takes that cell and that cell I'm going to I'm going to do it just manually just so that we can see it so we're going to say this equals this prior year's accumulated depreciation plus and then we'll pick up the current year's depreciation expense 4,208 and then of course we can subtract this out once again equaling the 50,000 cost minus the accumulated depreciation as of year four book value going down to 8,917 let's do this a couple more times this equals the 50,000 we're going to say the accumulated depreciation equals the prior year's accumulated depreciation plus the current depreciation expense which is the same because it's straight line that gives us our accumulated depreciation then we'll subtract this out we've got the 50,000 minus the 45,292 giving us the 4,708 one more time then we have to stop because this is the last one and it's a shame so we're going to take that 50,000 and then we're going to get the accumulated depreciation which will equal the 45,292 accumulated depreciation for the prior year and then we'll pick up the 4,208 current year depreciation expense that given us the accumulated depreciation for year six 49,500 if we subtract this out then we get the 50,000 minus the 49,500 which should bring us to 500 that's the salvage value so that's kind of our check figure if you're able to do the whole problem it's nice to do so because when then we have the check figure and we could say oh did it stop the where we wanted it to 500 yes now if we don't have any salvage value which could be the case in in a lot of actual depreciation problems then of course it would stop at zero but if we have a salvage value it should stop at the salvage we will not depreciate any longer because that's the salvage that's what we can sell it for that's what we think basically we can scrap the machinery equipment for at the end of its useful life